Background

What is Information Technology

Perhaps we should start by first defining what IT really is. According to the Information Technology Association
of America, information technology is the study, design, development,
implementation, support or management of computer-based information systems,
particularly software applications and computer hardware. Essentially anything that has to do with
computers and computing is some form of information technology. Therefore, whenever organizations choose to
buy computers, databases, networks, software, or many other computer related
materials, they are making an investment in IT. Although on the surface this seems like a great thing, the reality is
that its not immediately evident that investing in IT is actually
profitable. In fact, much of the evidence from the 1960s to the 1980s indicated otherwise.

What about the Productivity Paradox

The productivity paradox (also the Solow computer paradox) is the peculiar observation
made in business process analysis that, as more investment is made in information technology,
worker productivity may go down instead of up. This observation has been firmly supported
with empirical evidence from the 1970s to the early 1990s. This is highly counter intuitive.
Before investment in IT became widespread, the expected return on investment in terms of productivity was 3-4%.
This average rate developed from the mechanization/automation of the farm and factory sectors. With IT though,
the normal return on investment was only 1% from the 1970s to the early 1990s.

There were a number of theories proposed that explained the productivity paradox. There ranged from
ideas about inadequate measurement of productivity to the necessary lag period before actual gains in
productivity could be seen. Until recently these explanations were little more than theories, but now
many of them have hard evidence to support then due to studies that show a large increases in productivity
in companies that invested heavily in IT.

Stage 1

These were the early days, when not much was known about the implications of IT investment and expectations
were huge. The idea of IT investment was so novel that there was a broad notion that IT was going displace labor
entirely. Ever since this early period of investment in IT, it was assumed that labor productivity was the correct
way to measure the impact IT had.

Stage 2

This stage started in the late 1970s and marked the first indications that the result of IT investment was less
than expected. Even though this was the case, companies continued to funnel huge amounts of capitol into
computing. Most companies didn't even bother to try and evaluate their IT investment. Those that did usually
only used return on investment calculations.

Stage 3

This stage, which spanned the early 1980s, was marked by the realization that IT was only to be used in terms of productivity. Instead, companies
began to use IT strategy. Several comapanies (American Airlines, American Hospital Supplies, and Citibank) strategically
used IT to create a competitive advantage over their competitors.

Stage 4

By the late 1980s IT investments migrated to management information systems. In this new area IT was no longer expected
to be directly productive. It was also during this time that numerous explanations for the productivity paradox
emerged. Although none of them individually provided a concrete explanation, collectively they hinted at a larger problem.

Stage 5

After the late 1980s, most of the investment in IT has been in telecommunications. With this new area of
investment, expectations of productivity increases were further lowered.